Archive for January, 2007
January 26, 2007
- It seems that 2007 should be a brighter year for Johnson & Johnson (NYSE JNJ). In 2006 the company faced major drug expirations which dampened revenue growth.
- I really like the Pfizer’s (PFE) consumer business acquisition. Despite having a fairly good product line, Pfizer Inc was a pharmaceutical company that happened to have consumer products which came with the Warner Lambert acquisition. JNJ on the other hand has a culture of running diverse healthcare and consumer businesses.
- It reminds me of 3M Company (NYSE MMM), as there is a synergy between different operating units as they share their R&D findings.
- JNJ has a greater global consumer distribution network than Pfizer, therefore, it will be able to increase sales of PFE’s consumer unit by taking the products to places that they’ve not gone before (sounds Star Treckish, doesn’t it?)
- Abbott Laboratories (ABT) received an incredible price (34 times operating earnings) for its diagnostic unit that was sold to General Electric (NYSE GE) (great job!).
- I always looked at ABT as a mini-JNJ; it is a diversified healthcare company which is not heavily dependent on blockbusters. The company had a good quarter and should have a good next year. It is trading at about 18x earnings, higher valuation than JNJ’s 15x earnings, but it should have a bit higher growth rate.
January 26th, 2007
I can’t say I was surprised to see that Royal Dutch Shell (NYSE: RDS.A) will be “selling” 50% plus one share of the Sakhalin-2 project to Gazprom for $7.5 billion. Several months ago, the Russian government wanted to take Royal Dutch Shell to court because it was ruining the environment. I suppose when the Russian government referred to the environment, it meant the economic environment, not Mother Nature. The “environmental” issue was very simple: Product sharing agreements (PSA) signed by the Russian government with Shell were not considered advantageous to Russia — at least not anymore.
The 7.5 billion-dollar question comes to mind: Did Gazprom buy a controlling stake in the Sakhalin-2 project at a fair price? It’s hard to say. $7.5 billion is not chump change, but Shell didn’t sell a controlling stake in the project — which, by the way, insured a replenishment of its dwindling oil reserves for years to come — at its own will. You don’t have to be a genius to figure out that after “selling” (I use that term loosely because it assumes willing participants on both sides) its stake in the Sakhalin project, the environmental issues will not be issues any more.
I’ll be blunt: The Russian government manipulated its environmental/legal levers to muscle an ownership stake in the project out of Shell, possibly at a significant discount. I understand that it’s so much easier to be sympathetic to the poor children and elders that this oil money is supposed to go to, than to a multibillion dollar, impersonal, foreign (Dutch to be exact) oil company.
Continue Reading January 25th, 2007
By Vitaliy Katsenelson, CFA
January 23, 2007 - Minyanville.com
I am not a market timer, I have no idea when the market will turn - it is too difficult to execute market timing strategy on a consistent basis, in my opinion. The worst thing that could happen to you is if you end up being right once about a change in market direction. Why? Because you’ll think that you figured it out and will lose (or not make) money in the process. My answer to market timing is a strict buy and sell discipline. For every stock in the portfolio I set a buy, hold and sell price (actually I prefer to set P/E targets).
Recently quite a few of my firm’s stocks have been hitting the “sell” range and we have been selling. In the roaring market, emotions guide us into doing the opposite of what we should be doing; they tell us “buy” instead of “sell.” So I let discipline dictate what I do.
There are very few stocks on my watch list hitting “buy” valuations today. The group that is becoming increasingly attractive is oil services stocks, however. In fact, my firm took a position in BJ Services Company (NYSE BJS) last week and we’re looking to add more oil services names to the portfolio. We are buying these stocks because they are hitting our valuation targets, not because our emotions are telling us to do so.
January 24th, 2007
I am not a buyer of Abbott Labs(ABT) at this price, as the margin of safety has been depleted by the latest stock 
appreciation. But I like its latest transaction with General Electric (NYSE GE). Abbott proved to be a shrewd buyer and seller. It played Johnson & Johnson (JNJ), Guidant (GDT) and Boston Scientific (BSX) masterfully and positioned themselves to be the ”stealth” winner any way that the JNJ/Guidant or Boston Scientific/Guidant acquisition turned.
Diagnostic segment that Abbott is selling to GE for $8.5 billion generates revenues of $2.5 billion and has a 10% EBIT margin, putting a multiple of 34 times operating profits - that’s a nice fat premium - very smart on Abbott’s part. In GE’s defense, it could probably drive some costs out of this business once it combines it with the rest of its medical business.
January 19th, 2007
By Vitaliy Katsenelson
T. Boone Pickens knows oil better than most people out there, definitely better than me. However, his calling into CNBC seemed like a desperate attempt to influence oil prices.
I’m not a big fan of large oil companies as most of them have little or no organic production growth and they are completely at the mercy of oil prices, but I am getting 
interested in oil service stocks for several reasons:
Oil service stocks are not as sensitive to oil prices as long as prices stay about $30+, oil companies will be making holes in the ground at a nice pace.
- They are better businesses - oil companies need to spend billions of dollars just to replenish their reserves (maintenance capex), then they have to spend billions on top of that to grow sales - not great businesses. Oil service stocks are on the receiving side of this capex and have relatively small maintenance capex. If the industry’s growth slows down, oil companies will still be spending billions on capex to replenish dwindling reserves (good for oil services stocks), where oil service companies will see a tremendous increase in their free cash flows which means high dividends and share buybacks.
January 17th, 2007
January 10th, 2006 - Minyanville.com
By Vitaliy Katsenelson
I have tremendous respect for The Financial Times. It is a great newspaper and I am privileged to write for it on occasion. But when I see FT write “Sirius Satellite Radio is paying “shock jock” Howard Stern an $83m bonus despite a 50 per cent (their spelling not mine) share price fall since he joined the fledging media group,” I get frustrated. I am frustrated not because of Howard Stern’s compensation, but because of a serious failure by the media to separate individual operating performance from the performance of the stock.
Howard Stern’s job was to bring subscriber growth. In fact, FT writes Stern’s “bonus was made on incentives tied to Sirius’s subscriber growth.” He did what he was hired to do – bring subscribers. Be it a CEO (Bob Nardelli comes to mind here) or a “shock jock,” Howard Stern should be compensated on what he can control – stock price is not one of those metrics. Tying Howard’s compensation to the performance of Sirius stock is not much different from tying his compensation to General Motors’ car sales – he has no control over it whatsoever. Howard Stern is a smart cookie, he is the most highly paid entertainer in the world after all, and thus he tied his compensation to something he could control – subscribers.
I wrote this article Howard Stern’s $500 million Sirius deal a bit more than two years ago, enjoy!
January 10th, 2007
In light of Howard Stern making the headlines with his $83 million bonus, I thought I’ll share this article with you that I wrote awhile back.
I thought I had seen the epitome of stupid management decisions during the dot-com bubble when ludicrous sums of money were thrown at pie-in-the-sky ideas under the guise of “strategic investments.” But Sirius’ (SIRI) management has proven me wrong. The firm has agreed to pay $500 million (real, not Happy Meal) dollars to Howard Stern for five years of his invaluable services. Assuming Stern works 500 hours a year, this amounts to $3,333 a minute for Stern’s uncompromising pursuit of radio excellence. Surely this is a bargain for someone who has spent years honing his interview skills with women in various stages of undress.
Continue Reading January 10th, 2007
By Vitaliy Katsenelson
Since I (unintentionally) became a member of Defend Bob Nardelli Club, I’ve received many emails telling me that Bob Nardelli didn’t do a great job managing Home Depot (HD). Most criticism is centered around Nardelli switching to using more part time labor which led to less knowledgeable employees, the less than sparkling store appearance and the view that the inventory management system being used is inferior to Lowes (LOW).
Let’s say all these points are accurate and there is a dichotomy between the on-the-surface and under-the-surface operational performances. But suppose Nardelli lost his job not because he didn’t manage the company well, but simply because the stock didn’t go anywhere during his tenure. One can argue that if the company was run by a better CEO, HD would command a higher P/E multiple. But take a look at Lowe’s, it is supposedly a much better run company, but it trades at similar P/E.
Milton Friedman said, “the stock market and economy are two different things.” I say the stock and an underlying company are two different things too.
January 5th, 2007
The ousting of Bob Nardelli sent a wrong message to American CEOs: it taught them an incorrect lesson – manage the stock, not the company.
As Herb Greenberg mentioned in his column, if Home Depot’s (HD) stock went up while he was in charge he would still have a job, though he’d be $210 million poorer.
Bob Nardelli was a terrible stock promoter (not his job), but he did a terrific job managing the company (his job). As I mentioned in the past, from the time Nardelli took over Home Depot in 2000, Home Depot’s earnings have grown at an amazing clip of 20% a year, revenues over 15%, net margins have increased and return on capital went up every single year. The stock has not gone anywhere during his leadership because it was grossly overpriced in 2000.
Continue Reading January 4th, 2007
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